9 Oscillator Indicators You Need to Learn

Investors rely on various specialized tools to analyze stock prices and conditions. 

One of the most important tools is an oscillator. In trading, an oscillator is most often used to signal overbought or oversold conditions, allowing traders to build their strategy accordingly. Here are nine of the most common oscillator indicators and how they work.

What Is an Oscillator?

What is an oscillator in trading? Oscillators are a type of chart indicator used to determine the movement of a stock. These technical tools are most commonly employed when investors can’t determine a trend behind a given stock price.

Oscillators are technical analysis tools that create a set of high and low extreme boundaries, then develop a trend indicator that oscillates (fluctuates) between them.

How Oscillation Works

When using an oscillator, you’ll pick two values and place the tool between them. The oscillator will fluctuate between the two extremes, creating a trend indicator that provides insight into the current stock market conditions for an individual stock or security.

If the oscillator moves toward the upper extreme, the asset is generally considered overbought. But if it moves toward the lower boundary, the asset is generally considered undersold.

In most cases, oscillators are used in conjunction with other technical indicators when evaluating an asset, though they can be useful when an asset displays no clear trend.

9 Indicators Based on Oscillation

Market analysis has produced a variety of oscillators. While they all operate on the same principles described above, each has its own unique use cases.

1. Accelerator Oscillator

An Accelerator Oscillator is a basic decision-making tool that helps investors identify positive and negative values. If the last bar on the oscillator chart is in the green, it’s generally considered not a good time to sell. Conversely, if the last bar on the chart is in the red, it’s generally considered not a good time to buy.

2. Awesome Oscillator (AO)

Originally developed by technical analyst Bill Williams, the Awesome Oscillator (AO) measures market momentum by comparing current data to market momentum over a wider frame of reference, allowing users to affirm trends or speculate on future reversals.

For example, investors may use an AO to try and forecast whether an asset could maintain momentum or display a new trend.

3. Chaikin Oscillator (CO)

The Chaikin Oscillator (CO) is also a momentum oscillator, though it’s specifically designed to measure the accumulation and distribution of a stock rather than solely evaluate the price.

For example, investors can use the CO to look at the buying and selling pressure of a given asset. A positive CO value indicates strong buying pressure, while a negative CO value indicates selling pressure.

4. Chande Momentum Oscillator (CM)

The Chande Momentum Oscillator (CM) relies on a formula to determine strengths and weaknesses within a market. The formula subtracts recent losses from recent gains, then divides this value by all price movements for a given period. Investors might use the CM to determine the strength of an asset for a certain window of time.

5. Commodity Channel Index (CCI)

The Commodity Channel Index (CCI) presents the difference between an asset’s current price and its historical average. If the CCI value is positive, it means the price is above the historic average. Investors might use this information to determine whether an asset is undervalued or overvalued relative to its historic average.

6. DeMarker Indicator (DeM)

The DeMarker Indicator (abbreviated as DeM or DeMark) is used to help forecast price activity on a short-term basis, usually 14 days. Short-term traders can use the DeM to time their entry and exit points.

7. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) illustrates and analyzes two Exponential Moving Averages (EMAs) of a given asset’s price. It does this by subtracting the 26-period EMA from the 12-period EMA. Investors might use the MACD when looking for bullish or bearish divergences that may hint at trend reversals.

8. Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that measures the rate at which a commodity changes in price.

The advantage of the Relative Strength Index is that it can show when an asset may be overbought or oversold, along with possible trend reversals. Investors might use this tool in trading ranges when they’re not dealing with trending markets.

9. Stochastics

They’re used to understand the relationship between an asset’s closing price and its historic price range for a given period. Investors can use this data to help make strategic buying and selling decisions.

Considerations When Using These Indicators

While there can be advantages to using an oscillator in trading, investors should understand the following:

• Oscillators can’t always show the direction of a trend.
• Oscillator charts can be misleading during trends.
• Oscillators are best used in conjunction with other technical indicators.

This simply means that an oscillator alone can’t always help you make investing decisions — it’s just another tool to help you evaluate investments.

Other Technical Analysis Tools

In addition to oscillators, investors should familiarize themselves with other common types of technical indicators, such as:

• Simple moving averages: SMAs calculate the average price of a security over a specified number of periods, which helps smooth out price data to identify trends more easily. They are often used by traders to make buy or sell decisions based on the average price over time.
• Exponential moving averages: Exponential moving averages (EMA) give more weight to recent prices, making them more responsive to new information and price trends. Traders use EMAs to identify potential entry and exit points in the market due to their faster reaction to price changes compared to SMAs.
• Bollinger bands: They consist of a middle band (SMA) and two outer bands that are standard deviations away from the SMA, providing a visual representation of price volatility. Traders use these bands to gauge overbought or oversold conditions, helping to identify potential reversals or continuation in price movements
• On-balance volume: OBV is a technical indicator that measures buying and selling pressure by adding volume on up days and subtracting volume on down days. It is used to confirm trends and forecast potential price movements by analyzing the relationship between volume and price changes.

These indicators can be used in conjunction with one another to provide a comprehensive understanding of an asset’s strength and price trends.

Compare the Best Stock Brokers

To learn even more about the world of investing, consider turning to an investment platform. The right platform can keep you informed about the market and assist you with investment analysis tools.

Making Data-Driven Investing Decisions

Oscillators help investors make decisions based on solid data. The right investing platform can offer tools and resources to help you learn to use these indicators and potentially make better trading decisions.

Frequently Asked Questions